3 Objectives Learn about the history of Structured ProductsDevelop an understanding of how structured products workWhy they continue to deliver market- beating returns.

4 Warning!! The following may make your head hurt a littleDon’t panic – you can get copies if you’re interestedAsk questions as we goIt won’t take longMost people remember some of itIt’s actually easier than most people think

5 What is a Structured Product?An investment that delivers returns in a different way to direct investment in the underlying asset.Generating higher income instead of capital growthProviding capital protection on ‘higher potential’ asset classesEnhancing returns from modest market gainsBacking investment views in a concentrated wayAccessing hard-to-buy asset classes

6 Investor Attitude Rate FixationLegacy of Building Society retail funding requirement – they had to get so much money from retail investors before they could borrow any institutionally – so heavy rate competition (different to most other countries).Short TermismBritish are eternal financial optimists, a better “rate” is just around the corner, so don’t like to “tie-up” their money too long.Like to buy products they think they understand, rather than take advice – poor image of financial advisers, reluctance to discuss personal finances.

7 Popularity of Structured ProductsShort and defined termOften promoted with a “headline” rateGood value (normally half the price of OEIC/UT)Passive investment (not paying to underperform)Variety of structures to suit particular needsTerms are fixed at outsetGenerally easy to understand and evaluateDeliver returns in sideways markets

9 Counterparty CollapseBanks took on too much riskManagement focussed on sales – retail background led to desire to sell more loans (tins of beans) without credit considerations.Counterparty issue hadn’t been clearly presented or understoodNothing is risk-freeAdvisers should pay attention and cover their rears!If it looks too good to be true…

10 The Component Parts “Cash” Call options Put optionsMedium Term Notes/Zero Coupon Bonds. Debt issued by banks. Just like corporate bonds. Options normally embedded in the MTN. Counterparty issue!Call optionsThe right (but not the obligation) to buy something at a predetermined price at a point in the future.For example, the right to “buy” the FTSE 100 at 6000 points in 5 years time.Put optionsThe right to sell something at a predetermined price at a point in the future.For example, the right to “sell” the FTSE Index at 6000 points in 5 years time.Option normally embedded in structure.

15 Features Capital Protection Early Kick-Outs‘Soft’ protection – as long as the worst Index has never been below 50% of its start value.Check barrier level – is 60% a 40% drop or 60% drop?American option = below 50% at any point.European option = below 50% at maturity.Early Kick-OutsEarly maturity with bonus if certain levels achieved.Auto-call products, single or multiple underlying.Coupon Counter/Podium payoff – income/growth hybrid.

16 Features Stock Baskets Counterparty Risk Always AskReturns linked to a basket of stocks/indices/commodities can give more diversification.Remember, single shares can collapse completely, but indices never die – they just change constituents.Counterparty Risk‘Riskier’ banks will pay higher returns (better looking products, wider margins).Think of your excuse in case things go wrong.Always ask – you should always be told.Always AskWhy is it different to everything else?Make sure you understand the payoff in different scenarios.Complexity may not be a bad thing, but check.

17 Why the Bad Reputation Bad news makes a good headline.Compensation culture – everyone’s a victim if there’s money in it.PR from “vested interest groups” – Threat to traditional funds.“I thought it was guaranteed” - Well pay attention can’t you read!Execution only salesShould have spoken to an adviser, or bought a product you understood!Products “sexed up” to look better than they were.Counterparty issue not clearly highlighted.Some providers too greedy – Inappropriate counterparties used.

19 Investment Backdrop Developed equity markets lagging – particularly UKChanges in capitalismShares were owned by people with a vested interest in their long term performance (company pension funds etc.)Shares now owned by Fund Managers – interest only in relative performanceFund manager income from stock-lending (which also encourages downward speculation)Focus on attracting new investments.10 year FTSE flat – CEO remuneration up 400%*!!Too many snouts in the trough.*Source Manifest MM&K

20 10 Year Fund Performance Total number of funds 18,154Funds with 10 year record4,217 (23%)10 year growth greater than 5% p.a.2,047 (11%)10 year growth greater than 10% p.a.676 (4%)Source: Morningstar 16th September 2011

21 Simplicity Leads to SuccessProduct should be understandable in 2 paragraphsRemember, most investors are used to building society savings accountsBest to use recognisable underlyingsEveryone likes a headline rate

22 The IDAD Difference How have the IDAD notes performed so far?Year of IssueAutocalls Issued (GBP, USD, Euro)Matured By First AnniversaryAnnualised Return exceeded indexOngoing > year 1 since issuanceOngoing < year 1 since issuance2008320091615612010402517114201159